Thoughts On Economics

Wednesday, January 01, 2020

I study economics as a hobby. My interests lie in Post Keynesianism, (Old) Institutionalism, and related paradigms. These seem to me to be approaches for understanding actually existing economies.

The emphasis on this blog, however, is mainly critical of neoclassical and mainstream economics. I have been alternating numerical counter-examples with less mathematical posts. In any case, I have been documenting demonstrations of errors in mainstream economics. My chief inspiration here is the Cambridge-Italian economist Piero Sraffa.

In general, this blog is abstract, and I think I steer clear of commenting on practical politics of the day.

I've also started posting recipes for my own purposes. When I just follow a recipe in a cookbook, I'll only post a reminder that I like the recipe.

Comments Policy: I'm quite lax on enforcing any comments policy. I prefer those who post as anonymous (that is, without logging in) to sign their posts at least with a pseudonym. This will make conversations easier to conduct.

Friday, May 18, 2018

Hilary Putnam has long argued that facts and values, or ends and means, cannot be neatly separated. In 1981 he proposed a thought experiment, I assume not to be of contemporary political relevance:

What troubled us earlier was that we did not see how to argue that the hypothetical 'perfectly rational Nazi' had irrational ends. Perhaps the problem is this: that we identified too simply the question of the rationality of the Nazi (as someone who has a world view or views) with the rationality of the Nazi's ends. If there is no end 'in' the Nazi to which we can appeal, then it does seem odd to diagnose the situation by saying 'Karl has irrational goals.' Even if this is part of what we conclude in the end, surely the first thing we to say is that Karl has monstrous goals, not that he has irrational ones.

But the question to look at, if we are going to discuss Karl's rationality at all, is the irrationality of his beliefs and arguments, not his goals.

Suppose, first, that Karl claims Nazi goals are morally right and good (as Nazis, if fact if not in philosophers' examples, generally did). Then, in fact, he will talk rubbish. He will assert all kinds of false 'factual' propositions, e.g., that the democracies are run by a 'Jewish conspiracy'; and he will advance propositions (e.g. that, if one is an 'Aryan', one has a duty to subjugate non-Aryan races to the 'master race') for which he has no good arguments. The notion of a 'good argument' I am appealing to is internal to ordinary moral discourse; but that is the appropriate notion, if the Nazi tries to justify himself within ordinary moral discourse.

Suppose, on the other hand, that the Nazi repudiates ordinary moral notions altogether... I argued that a culture which repudiated ordinary moral notions, or substituted notions derived from a different ideology and moral outlook for them, would lose the ability to describe ordinary interpersonal relations, social events and political events adequately and perspicuously by our present lights. Of course, if the different ideology and moral outlook are superior to our present moral system then this substitution may be good and wise; but if the different ideology and moral outlook are bad, especially if they are warped and monstrous, then the result will be simply an inadequate, unperspicuous, repulsive representation of interpersonal and social facts. Of course, 'inadequate, unperspicuous, repulsive' reflect value judgments; but I have argued that the choice of a conceptual scheme necessarily reflects value judgments, and the choice of a conceptual scheme is what cognitive rationality is all about.

Even if the individual Nazi does not lose the ability to use our present moral descriptive vocabulary, even if he retains the old notions somewhere in head (as some scholars, perhaps, still are familiar with and able to use the medieval notion of 'chivalry'), still these (our present moral descriptive notions such as 'considerate', 'compassionate', 'just', 'fair') will not be notions that he employs in living his life: they will not really figure in his construction of the world.

Again, I wish to emphasize that I am not saying that what is bad about being a Nazi is that it leads one to have warped and irrational beliefs. What is bad about being a Nazi is what it leads you to do. The Nazi is evil and he also has an irrational view of the world. These two facts about the Nazi are connected and interrelated; but that does not mean the Nazi is evil primarily because he has an irrational view of the world in the sense that the irrationality of his world view constitutes the evil. Nevertheless, there is a sense in which we may speak of goals being rational or irrational here, it seems to me: goals which are such that, if one accepts them and pursues them one will be either be led to offer crazy and false arguments for them (if one accepts the task of justifying them within our normal conceptual scheme), or else one will be led to adopt an alternative scheme for representing ordinary moral-descriptive facts (e.g. that someone is compassionate) which is irrational, have a right to be called 'irrational goals'. There is a connection, after all, between employing a rational conceptual scheme in describing and perceiving morally relevant facts and having certain general types of goals as opposed to others.

Hilary Putnam (1981). , Cambridge University Press, pp. 211-214.

But this a thought experiment that takes an obvious consensus for granted. Fascism is bad.

Saturday, May 05, 2018

My favorite school of thought in economics is sometimes called Neo-Ricardianism, instead of Sraffianism.
As I understand it, the label "Neo-Ricardianism" was invented in 1974, as an insult, by Bob Rowthorn.
Basically, he claimed to more closely follow Marx, and claimed that the Neo-Ricardians were, like neoclassicals,
bourgeois economists. Other Marxist economists at the time offered arguments along the same lines.
Franklin Roosevelt III, for example, did not use the label "Neo-Ricardian", but rather described Sraffians
as in the grip of commodity fetishism.

(This Roosevelt is the grandson of FDR, the United States president. According to
Wikipedia, he is
a Du Pont on his mother's side, and therefore a descendant of the famous physiocrat. I've
also recently read one in the series of Elliot Roosevelt's mystery novels, in which his mother
Eleanor is the detective.)

One aspect of the Marxist argument against Sraffians harkens back to J. S. Mill. The claim is that, in Mill,
production is taken as a matter of natural law, while distribution is a matter of social laws that can
be freely changed, if we collectively decide so, perhaps through government. According to Marxists, production
and distribution cannot be separated like that. You can see why this might be described as commodity
fetishism, in which social relations are taken as natural relations.

This argument also provides a context for understanding some chapters in Steedman (1977). Sraffa, for some
purposes - e.g., internal criticism of neoclassical economics - takes quantity relations as given, while
considering what prices would be if some distributive variable were at a different level. But, Steedman argues,
that, in principle, one can relax what is taken as given. The length of the working day or the intensity
with which laborers work might be varied in the analysis. This is not just a matter of, say, increasing
all inputs in a production process by some proportion. You would want to consider how fuel, oil, or
other elements of working capital vary with output, how output varies with concrete production processes,
and whether or not these variations have an impact of the efficiency on machinery of various ages.
I suppose I ought to also mention Steedman's polemics, especially his labeling of some anti-Sraffa
Marxists as "obscurantists".

Of course, many arguments have been developed on both sides over the nearly half-century
since these charges and counter-charges were first offered. Does Sraffa provide a constructive
alternative, as well as an internal criticism of neoclassical economics? Do Sraffian interpretations
of classical economics hold up as history? How do issues of money enter? Is Sraffian economics
confined to logical - not historical - time? How do market prices relate to prices of production?
And what does this all have to do with Marx?

Another famous adoption of "Neo-Ricardism" as an insulting label for Sraffianism comes shortly
later from Frank Hahn, who was no Marxist.

Tuesday, May 01, 2018

The Financial Times is having a debate about whether economics has failed. The first interchange is
here,
with some followups
here.
(I happen to have
twotabs
about neoliberalism open at the moment as well.)

Mainstream economics is a failure in so many dimensions that its failure cannot be characterized shortly in any comprehensive
way. For example, I am not going to discuss funding sources and economics role as a system justification.
Even so, you might find this post long and wandering.

As you can see, I do not take the claim to be that non-mainstream, heterodox economics has failed. In the comment section,
for one FT page, Percy Pavilion writes, "So Marshall, Keynes, Kahn, Kaldor and Harcourt failed did they?"
I think any opinion on whether Keynes, Kahn, Kaldor, and Harcourt were failures to be irrelevant to the topic.
Was it Joan Robinson, commenting on the claim that it is all in Marshall, said something like, "The problem is
that the opposite is also in Marshall, too"?

Anyways, I want to focus on the failure of economic theory. I think any well-trained economist in some field
knows how to tweak assumptions to get any results that they want. Start with a model of perfect competition.
Add an information asymmetry, a transaction cost, a search cost, sticky prices and a Calvo fairy,
some monopoly or monopsony, whatever. Then you can argue
that some policy will lead back to efficient markets. Or, if so inclined, that government failure prevents
any some implementation.

Given this openness to such tweaks in mainstream economics, why is Sraffian economics or some other
variety of heterodox economics not more widely accepted? Most of the time, when I or others put
forward a model with Sraffa effects,
we are not arguing about the implications of an imperfection. Rather, the argument is that the model
of perfect competition does not work the way that mainstream economists teach. And this
is usually in an open model with no way to resolve class interests in some utopian world.
To understand such models, it is helpful to have some understanding of the history of political economy
and alternative theories of value and distribution. As Mariana Mazzucato notes at the FT, mainstream
economists are trained to be ignorant of such topics.

What to make of empirical research? Some of it, say,
on malarial nets,
is by researchers striving to be useful. One can raise questions about external validity
and whether atheoretical research is
possible or desirable.
But this is a different direction from my comments above.

But how does the theory relate to the supposed empirical turn? Are textbooks
updated
to state that some theories (e.g., skills-biased technical change) have been rejected by
the evidence?
Can you point to an introductory textbook that includes a section on behavioral economics and
empirical evidence? (I expect "Yes" to be an answer to this question.)
But how many experiments decide between contrasting theories?
It is my feeling that the ability to tweak a theory includes an ability to maintain it
as consistent with any empirical evidence that shows up.
And much empirical work takes a particular approach for granted, without testing it.
I like reading Marshall Steinbaum,
but will cite him as somebody that does not realize how many effects he takes as a consequence of
monopsony might be consistent with Sraffian price theory, before adding in
failures of competition.

I am unsure how to take a lot of applied research. I do not think tariffs on
steel and aluminum should be imposed on the whim of an ignoramus. I suppose
one can use Leontief matrices to trace through the effects of such tariffs
on the automotive industry, aluminum cans and the beverage industry, etc.
And I suppose that one can apply game theory after the fact to rationalize,
say, the Chinese reaction. But can one say beforehand whether soy bean farmers
in the mid west or Boeing executives trying to sell Dreamliners should have
more to worry about? And is not the question of the long term effects
of undermining the World Trade Organization more a qualitative question
for historians that data-driven economists?
I want to take analysis of the possible
effects
of the exhaustion of North Sea oil reserves on sustainable social spending
in Norway as useful. But I suspect that if I look carefully, I will find
theoretical errors embedded in many of the equations in supposedly
applied research.

I am amused that Maurice Obstfeld shows up in the FT interchanges, when I have just
demonstrated
the failure of what Krugman and Obstfeld teach in one edition of their textbook on international trade.
I am aware
that the boundary between mainstream and non-mainstream economic theory is not necessarily well-defined.
Nevertheless, I do not expect most mainstream economists to be able to conduct a reasonable conversation about
the topics in this post. At the FT, Diane Coyle, Tony Yates, and Tim Harford exemplify my expectation. And much of
what I am saying is old hat. You can see some of what I am saying as echoing
Christian Arnsperger and Yanis Varoufakis.
Or even Robert Solow.

Wednesday, April 25, 2018

I have written up
my recent explorations in the theory of international trade.

Abstract: This article considers a model of international trade in which the number of produced commodities
does not exceed the number of countries engaged in trade. Technology is modeled such that each commodity
can be produced in each country from a finite series of dated labor inputs. The existence of a positive rate of
profits may lead a country to specialize differently than how it would with a zero rate of profits. Trade may
leave consumers in a country worse off, as compared with autarky, when the rate of profits is positive.
The existence of more than two countries provides a possibility that the Production Possibilities Frontier (PPF)
with trade is neither unambiguously above or below the PPF under autarky. This article re-iterates, in a
setting with more than two produced commodities and more than two countries, demonstrations that the
argument for free trade is logically invalid, given positive rates of profits.

Beatrice Cherrier has some frankly speculativeposts on what limitations economists accepted in emphasizing tractability in developing models.

Nathan Robinson does not like the word "neoliberalism", but understands there is a point to using it.

David Glasner writes about Hayek's introduction of the theory of intertemporal and temporary equilibrium paths into economics. (I have no problem for those who look for Irving Fisher as a precursor of for more-or-less simultaneous discoveries in Sweden.)

Tuesday, April 17, 2018

This post continues a previous
numericexample.
The firms in each of three countries are assumed to know a technology for producing corn, wine, and linen.
The technology is such that each commodity can be produced in each country. The technology varies among
countries.

Each of these small open economies can specialize and obtain non-produced commodities through foreign trade.
I confine myself to patterns of specialization in which:

Each country produces exactly one commodity domestically.

Each commodity is produced in one country.

Six patterns of specializations meet these criteria. Table 1 lists the commodity produced in each country
for each pattern of specialization.

Table 1: Patterns of Specialization

England

Portugal

Germany

I

Corn

Wine

Linen

II

Corn

Linen

Wine

III

Wine

Corn

Linen

IV

Wine

Linen

Corn

V

Linen

Corn

Wine

V

Linen

Wine

Corn

I have found out that, in my example, each specialization is consistent with a long period position. I take
the international price of corn as numeraire. That is, p1 = 1. Table 2 lists the prices of the other
commodities, p2 and p3, that are traded domestically. It also lists rates
of profits, r1, r2, and r3, in each country. This data is sufficient
to calculate the wage in each country. The wage is such that supernormal profits are not earned in the commodity produced
domestically, but the cost (including profits) does not exceed revenues for produced commodities. With these wages,
the costs of producing a commodity in which a country does not specialize will exceed the price. It is cheaper in
each country to acquire such commodities on international markets.

Table 2: International Prices and Rates of Profits

Priceof Wine

Priceof Linen

Rate of Profits

England

Portugal

Germany

I

3/4

2/3

0%

0%

0%

II

0.83

0.7

50%

0%

20%

III

0.883

3/4

20%

60%

0%

IV

1.06

1.3

60%

50%

90%

V

1.1

5/4

40%

150%

70%

VI

4/5

0.754

0%

20%

20%

The prices shown in Table 2 are not unique. For the given set of rates of profits, international prices must fall within
a certain range to obtain a long period position consistent with the pattern of specialization. And rates of profits
may vary in certain ranges too. I have not figured out a good way of visualizing how the spaces of prices and rates of
profits is divided up by the patterns of specialization. Maybe a region for a given pattern of specialization if, contrary
to this example, restitching was possible under autarky.

The numeric example illustrates that:

The pattern of specialization in foreign trade can be driven by technology and the distribution of income.

Only some distributions are compatible with all countries being able to specialize in a consistent way.

The results of such specialization may not provide a country with overall gains from trade, nevermind
individual groups defined by the functional distribution of income.

I have assumed constant returns to scale, but which commodity a country specializes in producing may be of importance
because of considerations of learning-by-doing. Technological progress may be easier to obtain in some commodities
(e.g., manufactured industrial products) than others (e.g., products of agriculture).
I suspect these observations generalize to a more comprehensive Neo-Ricardian theory of trade, such as that of
Yoshinori Shiozawa.

These theoretical observations, I guess, are enough to blow up much mainstream teaching on trade. I might have
even made some progress on the work of Mainwaring, Metcalfe, and Steedman. Nevertheless, this model
puts much aside. I am thinking of, especially, Keynesian issues of exports, imports, and effective demand;
foreign exchange rates and monetary policy; and international finance.